Tuesday, April 5, 2011

Play the Long Side, Possible (very) Short-Term Consolidation, be Ready to Re-Enter

Remember, there is no face-to-face meeting this week, as I will be traveling to Knoxville on Wednesday - Sunday.  Please check the Yahoo! group poll and let me know the best dates for an electronic meeting, either next week or the following week.


  • We are in a confirmed up trend.  I am working hard to deploy capital, and today's pullback will be another opportunity to enter the market.
  • The GGT Price Index was up +0.26% on volume that was weak at -22% below the 50d MA.  I'm not so hung up on volume (remember December?) but I'd like to see strong participation from both price and volume.
  • The slopes of the pricing moving averages are all positive, which tells us that we're in an uptrend and that we should be playing the markets long ONLY.
  • The Price Accumulator Change Oscillator moved from -14 on Friday to +4 yesterday with the close, saying that the reward/risk levels of entry are a bit poorer.  The way to play this is to enter a trial position of 10-25% when the end-of-day readings are below -5 (Friday's close was -14), then add to those positions when the market pulls back (today, if it continues lower, would be another day to enter another traunch, simply because we know the oscillator will move downward by the end of the day into the value zone.)
  • The Short-Term LCR Change Timer has moved from LONG (+1) to LONG-CASH (0).  This means that the markets are weaker in terms of the Long-Cash Ratio of the database.
  • The Intermediate-Termed Elder Force Index timer is completely LONG.  
  • The Long-Cash Ratio (LCR) has just completed it's 12th consecutive days of gains, albeit yesterday was only a 1% change to the upside.  Putting this in perspective, we did 12 consecutive days in February 2010 and 13 consecutive days in March 2009.  I think we're due for some profit taking, so like I wrote yesterday, I'm not surprised to see a bit of consolidation occurring.
  • All of the slopes of the LCR through the 65 moving average are all positive.  The database is expanding in terms of LONG-rated stocks, on time scales less than 66 days.  This means that it is okay to purchase stocks long (swim with the current).
  • Despite the slopes of the LCR all being positive, I'm showing "peaking" activity in the LCR, e.g., yesterday could not close higher than Friday's value.  The analogy is a rock that you throw upward.  Yes, it's moving upward, but as it reaches the peak height, it actually is slowing.  We are at the "peak height" point in this analogy as far as the expansion of the database is concerned, and this means that we need to be prepared for some consolidation.
Conclusion:  buy stocks on the long side and avoid stocks on the short side.  I'm intending to enter stocks on a pullback, and will be watching today for a characteristic "V" pattern in the broad markets ... sell off early, bottom, then reverse towards the upside.  If I don't see the "V" then I most likely will wait to the very end of the day to enter positions.


Confirmation of this "Up" Leg

Take a look at the following chart (as with all my charts, right-click on the chart to open in a new window or tab):

This chart is constructed by plotting the GGT Price Index along with the 65d moving average of the Long-Cash Ratio.  If you recall, the GGT database is comprised of stocks that
  1. have above-average $-Volume (typically > $1Msh), 
  2. trade on the three primary exchanges, 
  3. have 50d average volume > 100K shares, and 
  4. all have share values > $1.  
Additionally, the Long-Cash Ratio is literally the ratio of stocks with a LONG recommendation to those with a CASH recommendation, with this recommendation being assigned nightly.  If we apply a 65d moving average to this value, then measure the slope of this average, we have the plot above.

What the 65d moving average does is help us understand the intermediate-trends within the GGT database of ~2400 stocks.  Note that this is NOT price, this is the amount of stocks changing from LONG to CASH and CASH to LONG on a given day, averaged over a 65 day period.  This tells us more about the ebb and flow of the markets in terms of sponsorship rather than the price appreciation, which while important (it's what we bank), is only part of the picture.

The graph above shows when the slope of the 65d MA of the LCR has confirmed moves, as well as some other key dates that are fresh in your head.  When the value clears above the pink zone, the day-over-day change is positive, e.g., the database has more stocks entering LONG-rated recommendations than CASH-rated.  This is important -- we want to move to the long side when this value is positive, and generally, we want to be 100% invested on the long side when this value is clearing from the pink zone (below 0) to above the pink zone (above 0).

A few observations that I found interesting:
  1. On 3/15/11 the slope of the 65d LCR hit a minimum.  Of course, we would not have known this until it cleared into positive territory on 3/30, but we certainly would have seen the positive nature of the move between 3/15/11 and 3/29/11.  This, in fact, combined with other indicators, gave me confidence about this move.
  2. It certainly is possible to move upwards in price with the 65d slope line below 0.  What is more telling is that as the slope line is moving downward, from any region, there appears to be a direct correlation between price declines in the database as well as a decrease in the LCR slope value.  We obviously would not want to purchase stocks while this 65d LCR slope value was dropping.
  3. Once the slope value stabilizes after falling, at any level, it appears that we have an opportune time to enter the market long.  Psychologically, this would be hard, because we've been falling and nobody knows if the present stabilization point is a pause to more decline or a reversal, but at this level, it would be a good opportunity to enter 10-25% of a position as a trial balloon, and ensure that good money management techniques are employed.
  4. Look at the values of the 65d LCR slope line the past two days -- we've seemed to have peaked at a local high.  Given that futures are lower as I write this, I expect to see some form of pullback today in the 65d LCR slope line.  The magnitude of the pullback in the markets will determine whether the 65d LCR slope line only drops a bit or a significant amount, and we won't know this until the market closes tonight.
Conclusion:  while the Price Accumulator Change Oscillator is indicating a +4 (a tad more risky to enter the markets than this past Friday), the overall trend is upward.  The slope of the 65d LCR average is telling us that we've hit a local peak, and that we can expect a short-term pullback.  We should be prepared to enter further positions on this pullback, and because the 65d LCR average is in positive territory (with other indicators, of course), we should attempt to deploy as much capital as possible on the long side of the market.

To address the question of which stocks to consider, my raw watch list, for consideration today, is a mixture of strong GGT stocks as well as strong Effective Volume stocks.  Here's my dashboard:

(Right-click on the image to open in a new window or tab).

Of course, I make no representations of the above watchlist to your particular situation, so as always, do your diligence, take ownership for your actions, and be responsible with your capital.


Trading Plan for Tuesday

I'm presently holding AA, CAT, DIS, FCG, GE, GUR, IDX, KOL.  If I see the characteristic "V" shape in price action during the day I'll continue to add incrementally to these positions.  With no "V" I'll most likely wait and see what the market does near the close of the day.

I've filtered the GGT/EV watchlist above to those stocks with favorable LEV patterns (not shown above, you'll have to do this yourself).  I'll be watching for the characteristic drop in price throughout the day but increasing LEV sponsorship, showing accumulation on price weakness.